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The following are excerpts from the January 2017 “Investment Insights” report, produced by the Global Investment Management team. For the full report, click here.

Market strategy: Obeying the speed limit

The last couple of months have been like driving your car in a fog. It would be equally dangerous to brake too abruptly as it would be to press down on the accelerator too hard. If asset allocators abruptly changed portfolio exposures based on every new event, they would likely have a collision in store from the rear or could run into obstacles on the horizon. It’s a pretty classic investment dilemma: what to do when equity valuations are high, but fixed income prospects are uninspiring. To wait out the momentum trend and sit on the sidelines, or to bite the bullet and ride a potentially short-lived wave.

Equities: Stocks too steamy?

The markets have been on an absolute tear after the United States presidential election in November with the S&P 500 Index rising almost 7% through the end of January. The pessimistic sentiment that some investors delighted in at the beginning of last year has completely reversed tones and become a feeling of investor optimism. The new-found positive sentiment has extended a rally that started in the depths of the Great Recession. The S&P 500 Index has returned 298.14% over the past 8 years from the March 9th 2009 low, and has even trumped the pre-recession levels in October 2007 by over 45%.

January wasn’t too shabby of a month either. The S&P 500 Index hit new record highs and posted a 1.90% return in the first month of the year. Many of the record-setting days seen by U.S. markets have been echoed in positive returns for international markets, which have helped to instill confidence in a resurgence of global growth and a synchronized recovery across country lines. Perhaps the greatest surprise over the past year and into 2017 has been the returns of emerging market stocks. Even as these countries face select raw material demand decreases, low commodity prices, and developed country central banks looking to increase rates, the returns for equities still managed to rise 11.50% in 2016 and 5.47% for January, according to the MSCI Emerging Markets Index. Much of the returns in 2016 were based off of two major contributors to the asset class – Brazil and Russia – recovering from deep recessionary pressures. However, Brazil’s thrust has continued into 2017, producing a 10.75% return for January, while China also contributed to positive performance by gaining 6.81% as represented by the MSCI Brazil and MSCI China indices, respectively.

Fixed income: Credit cycling uphill

After taking a spill following the presidential election, bonds seem to be steadily making up some of that lost ground. The Barclays U.S. Universal Bond Index gained 35 basis points in January as longer-term rates were little changed over the month. While the yield of the 10-year Treasury rocketed upward after the election, the benchmark gauge has remained mostly range-bound and ended the month yielding 2.45%. Investors seem to be taking a breather, at least on the bond side, to determine what’s on the horizon for the U.S. economy, but also what that means for monetary policy and the potential fiscal policies of the Trump administration. While safe-haven Treasuries have been just muddling through, other sectors in the bond market are faring a little better.

Click here to read more of the “Investment Insights” report from January 2017.
==Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation does not ensure a profit or guarantee against loss.

All content provided on the Bank of the West Change Matters site is informational. It is not financial, investment or tax advice. If you need financial, investment or tax advice, you should contact a qualified professional.

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